BMO Harris bank sued in Petters case

A new lawsuit alleges that bankers at M&I Bank ignored red flags as they handled Tom Petters' business accounts before 2008, helping the Minnetonka business mogul and now convicted fraudster perpetrate the largest Ponzi scheme in state history.

On Wednesday, Nov. 14, the successor to M&I Bank -- which handled $35.3 billion of Petters' corporate deposits from 2003 to 2008 -- was accused in a federal bankruptcy lawsuit with aiding and abetting fraud, breach of fiduciary duty and civil conspiracy.

The suit filed by Doug Kelley -- the court-appointed trustee in the Petters case -- seeks unspecified damages from BMO Harris, the Chicago-based parent company of the former M&I Bank.

At least one other lawsuit has been filed against M&I in the Petters case, in Florida.

Tom Petters

But similar trustee lawsuits alleging bank liability in fraud cases -- notably the Bernie Madoff Ponzi scheme in New York -- have had trouble proceeding, a bankruptcy expert says.

In the case filed by Kelley, M&I "was well aware of the frenzied activity" occurring in accounts for Petters Co. Inc., the complaint says. Petters Co. Inc., or PCI, was the Petters subsidiary through which the fraud was perpetrated. The principal, Tom Petters, was convicted in 2009 on 20 fraud counts and is serving a 50-year prison sentence.

M&I bankers regularly met with PCI representatives, including executive Deanna Coleman, "to learn and understand the business and needs of PCI," the complaint says.

Coleman played a key role in the Ponzi scheme that cost investors $3.

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5 billion in losses. Coleman exposed the scam to federal authorities in 2008 and was a key prosecution witness in Petters' trial.

"We believe the claims in the suit are completely without merit, and we intend to vigorously defend ourselves in this matter," Jim Kappel, a BMO Harris vice president and head of media relations, said in an email Wednesday.

Petters' business empire imploded in 2008 when Petters Co. was revealed as a massive Ponzi scheme. Revenue from the scheme was used to prop up Petters' legitimate businesses, including Sun Country Airlines in Mendota Heights, and finance acquisitions of other firms, including Polaroid Corp.

The complaint refers to "the astronomical sum of $35.3 billion" that was deposited in the M&I account between Jan. 1, 2003, and Aug. 31, 2008.

While money was supposed to be flowing into the M&I account from retailers such as Walmart and Sam's Club from the resale of consumer electronics goods -- as was described to Petters' investors -- the money actually was coming from shell companies set up by Petters and his associates, many of whom pleaded guilty.

One incident cited in the lawsuit describes a potential Petters investor contacting banker Edward Jambor at M&I by email in December 2003, to confirm that there was $39.3 million in the account to buy 100,000 cell phones. The investor had received authorization from a Petters' executive to get the information from the bank. But the account's balance on the day of the request started at $1.7 million and ended at $5 million, and at no point in that month had a closing balance near $39 million.

Jambor forwarded the email requesting the confirmation to Coleman without additional comments, the lawsuit says.

"Despite knowing something was radically wrong and illegitimate" about PCI's business, the lawsuit says, "Jambor failed to request or receive an adequate explanation" about the misrepresentation.

The complaint also says M&I turned down requests from Petters' investors who wanted a better idea of how money flowed in and out of the M&I account. Petters had told investors that retailers made deposits directly into the account to pay for merchandise that he had sold them. But the bank would have known that wasn't true, the complaint says.

Another M&I banker, Chris Flynn, was told in a 2002 meeting how PCI's business worked and that retailers were supposed to make payments into the account, the complaint says. He handled Petters' business at the bank after Jambor left in 2007.

Flynn and Jambor, who both work at other banks now, did not return calls seeking comment.

Of the $35.3 billion deposited into the M&I account, 68 percent came from Nationwide International Resources and the Enchanted Family Buying Co. The investigation into the Petters scheme showed those companies were shells set up at Petters' direction to serve as a conduit for investors' cash.

Also, 97 percent of the cash that flowed out of the PCI account was used to pay investors, the lawsuit says.

That flow of funds was not only "facially illogical," the lawsuit says, but it also conflicted with information that M&I received from Petters and others about how his business was structured.

"M&I knew that the representations made by Petters, Coleman and (Bob) White to PCI's investors regarding how PCI's business model operated were false," the lawsuit says. White also was a top Petters executive who specialized in forging purchase orders from retailers to fool investors into believing the company was dealing in huge amounts of merchandise. Both White and Coleman pleaded guilty to fraud-related charges and received prison sentences.

In an interview Wednesday, Kelley said a "minimum" for the damages he's seeking from BMO Harris would be $68.4 million, which is the total amount that was transferred from the M&I account to Petters' personal accounts from 2003 to 2008.

"There was no reason for that money to go to Petters," Kelley said.

While Kelley's latest suit is likely to raise the eyebrows of Petters' victims and area bankers, a bankruptcy expert called the case against BMO Harris "an uphill battle."

"To whom does the bank have a fiduciary duty? The victims? No. It's between the bank and the depositor," said David Leibowitz, a bankruptcy attorney in Chicago and the editor of the American Bankruptcy Institute's fraud manual.

He said it might not be clear that the bankers had a duty to report what they were seeing.

The lawsuit "will be tested on legal sufficiency grounds," Leibowitz said. "It's by no means a sure thing."

In the Madoff case, the largest ever uncovered, the trustee sued HSBC Bank for allegedly aiding and abetting Madoff's fraud and for breach of fiduciary duty.

Last year, after being moved from bankruptcy court to district court, a judge dismissed the trustee's claims against HSBC saying the trustee lacked legal standing to assert them.

An appeal was filed on that ruling this year. Other claims were returned to bankruptcy court for further proceedings.

Kelley said there's another case in Florida -- also related to the Petters scheme -- where a trustee filed a similar case against M&I Bank, and a judge threw out a motion by M&I to dismiss it on the same grounds that had been asserted in the Madoff case.

The Florida lawsuit is pending.

M&I was acquired by Montreal, Quebec-based BMO in 2010 and later merged with BMO's Harris Bank subsidiary in Chicago to form BMO Harris. It is the fifth-largest bank in Minnesota by deposit market share according to 2012 federal data.